Optimism at Work: What is Frictional Unemployment?

Shareholdr.com
5 min readJan 13, 2023

Unemployment isn’t a popular word, but it isn’t always bad. In fact, frictional unemployment can be great for an economy. You might want to know: what is frictional unemployment?

Well…have you ever quit a job so you can find a better one?

If you leave the workforce to get more education, or shop around for a better job, you are part of the workforce that contributes to the frictional unemployment rate. While unemployment is often seen as negative, frictional unemployment can help an economy grow.

Clearly, too much of a good thing is a bad thing, and this is very true for frictional unemployment. If everyone is quitting their job to look for a better one, the consequences would be dire. The job market needs to have balance, and natural progression from one job to another has to happen in a healthy economy.

Now you probably want to know what is frictional unemployment all about?

Let’s learn more about frictional unemployment!

What is Frictional Unemployment All About?

From an academic perspective, the frictional unemployment rate is found by dividing workers who are actively looking for jobs by the labor force in total. Simple enough. From a practical perspective, frictional unemployment occurs when new people enter the labor force, or people want to find better jobs.

Here are some of the people who might be counted in the frictional unemployment category:

New Entrants to The Labor Force

Anyone leaving high school or college to join the labor force will contribute to the frictional unemployment rate. These new entrants are looking for the best job they can get for their skills, so as they look, they will be considered unemployed.

People Looking For Better Work

If a person took a job to ‘work their way up’, they would eventually take the skills and experience they now have, and look for a new opportunity that pays them for their new abilities. When a person quits a job to look for a new one that is better, they contribute to the frictional unemployment rate. The good part about this class of frictional unemployment is that the people already have skills and connections, so they may not be unemployed for long!

Workers Returning to School

Many people quit a job to pursue more education. Technically, these people fall into the frictional unemployment category once they return to the workforce. While people generally don’t like the idea of unemployment, learning what is frictional unemployment helps you better understand labor dynamics.

Clearly, a person who has professional experience, and more education, will be an asset to the economy. Much like a professional who is looking for better work, a person emerging from additional education will be an asset to the economy, and isn’t likely to be unemployed for long.

Frictional Unemployment: What it Means

Frictional unemployment can be great for an economy, but there are also situations where it is a sign of problems ahead. One of the most important parts of assessing frictional employment is the number of open jobs for a given kind of professional, which will determine if they will reenter the overall workforce.

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The Good

In an expanding economy, people are optimistic about their prospects for advancement.

When an opportunity doesn’t present itself at their current job, a person who is dissatisfied with their current pay or working conditions will quit and look for better conditions at another workplace. When this happens, frictional unemployment is created.

We can see that this type of frictional unemployment is a sign of a robust economy where people are willing to take risks, and rise through the labor market. Workers gain skills and move up, which makes the economy stronger as a whole.

The Bad

While some amount of job seeking is good, if large parts of the workforce quits their jobs, and looks for better ones, productivity issues arise. It is vital that there is a vibrant employment market for job seekers, or the economy will suffer.

In addition, it is important for professionals that want to upgrade their position to be realistic about what is possible in the economy. In some cases it will be necessary to change locations, as economic growth is rarely uniform across a national, or global economy.

Excessive frictional unemployment can lead people to move to other locations, which can strain housing and other social resources if it happens at scale.

Solutions for Problematic Frictional Unemployment

Communication is important in the employment market. Employers and job seekers need to have active communication channels, so that people in the frictional employment category know what kinds of jobs exist, and they can keep their expectations in-line with reality.

One of the biggest things to help keep frictional unemployment at healthy levels is the internet, as it makes sharing employment opportunities simple. Today, professionals can look at a regional or global job market, and see what kind of real opportunities exist.

What Happens to Frictional Unemployment in a Bad Economy?

Unlike cyclical unemployment, frictional unemployment levels actually fall in an economic downturn. One of the biggest drivers of frictional unemployment is economic optimism, so when overall economic conditions falter, people are less likely to quit their job, and look for a better one.

Additionally, frictional unemployment is largely unaffected by fiscal stimulus. Most people see lower rates from the central bank, or stimulus spending by the government as events that occur in a bad economy, which hurts the optimism that drives frictional unemployment.

Frictional Unemployment: The Takeaway

Frictional unemployment is one of the only kinds of unemployment that is positive for the economy, and allows professionals to leverage their abilities to the highest level the economy will allow. It usually happens when the economy is expanding, and helps the overall economy grow stronger.

When people are optimistic about their job prospects, there will probably be a rise in frictional unemployment. While not always positive, frictional unemployment can be an early sign of an economic turnaround. Keep an eye on frictional unemployment if you want to know when people think they can get a better job, or when the labor market is in flux!

Originally published at https://shareholdr.com on January 13, 2023.

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